Real Wage Stagnation and the Brexit Exchange Rate Depreciation

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Abstract
This paper studies labour market consequences of the very large exchange rate depreciation from when the UK electorate unexpectedly voted to leave the European Union. As news came in revealing the leave vote, the value of sterling plummeted, recording the biggest one day depreciation in any of the world’s four major currencies since the collapse of Bretton Woods. The prospect of Brexit really happening generated sizable differences in how much sterling depreciated against different currencies. Coupled with differences in pre-referendum cross-country trade patterns, this resulted in variations in exchange rate depreciations facing businesses in different industries. This variation is leveraged to evaluate the labour market impact. The paper first considers revenue and cost channels operating through trade price responses, showing evidence the cost channel dominated as the price of intermediate imports rose by more in higher depreciation industries, with this not being offset by revenue increases from exports. Workers bore the brunt of the resultant increased cost pressures facing businesses, not in terms of job loss but through real wages which fell significantly and stagnated for workers employed in industries facing larger depreciations. Thus, real wage stagnation returned to the labour market because of the Brexit vote. Joint paper with Rui Costa and Swati Dhingra.